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Vansh Limited is a large and reputed company which manufactures ventilators. After the outbreak of ‘COVID-19’ in 2020 the company witnessed an increase in revenue by 40%. It has plans to further increase its production capacity and also start production of PPE kits, sanitisers and masks in 2022. The Finance manager of the Company Mr. Rajiv feels confident about the future of the company and its liquidity position. Discuss the meaning of Dividend Decision and in the light of the above statement explain any two factors which should be considered by ‘Vansh Limited’ while formulating the dividend policy of the company.

OR

Vedansh Limited has a share capital of ₹10,00,000 divided into shares of ₹100 each .For expansion purpose ,the company requires additional funds of ₹ 5,00,000 . The management is considering the following alternatives for raising funds : Alternative 1: Issue of 5000 Equity shares of ₹100 each Alternative 2: Issue of 10% Debentures of Rs. 5,00,000

The company’s present Earnings Before Interest and Tax ( EBIT) is ₹4,00,000 p.a. Assuming that the rate of Return of Investment remains the same after expansion, which alternative should be used by the company in order to maximise the returns to the equity shareholders. The Tax rate is 50%. Show the working.

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Dividend decision: The decision involved here is how much of the profit earned by the company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

Factors affecting Dividend decision:

1. Amount of Earnings: Dividends are paid out of current and past earnings. Therefore, earnings are a major determinant of the decision about dividend. 

2. Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non– growth companies. 

3. Cash Flow Position: The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend. 

4. Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay  higher dividends than the smaller companies which have relatively low access to the market.

OR

Rate of Return of Investment is 4,00,000/10,00,000 X 100=40%

EBIT after expansion = 40% X 15,00,000=6,00,000 

Calculation of EPS

                   Plan 1                         Plan 2

EBIT          6,00,000                    6,00,000

(-)Interest        -                            50,000

EBT           6,00,000                   5,50,000

(-)Tax(50%)  3,00,000                  2,75,000

EAT.                  3,00,000             2,75,000

No. Of shares.   15000.                  10000

EPS.                        20                  27.5

The company should use Plan 2 in order to increase the return to the equity shareholders.

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